How the UK discounters are outperforming the Big Four chains

Both the limited assortment grocers and the high street discounters are causing headaches for the major multiples

Bryan Roberts is a senior vice-president at Kantar Retail

Bryan Roberts of shopper and retail insights business Kantar Retail shares his insight into the reasons why the UK discount market is outperforming the Big Four

While Aldi celebrates its 25th anniversary in the UK this year, not that long ago the German discount retailer was contemplating a withdrawal from the British market altogether. But now – along with compatriots Lidl – analysts claim the retailer continues to present “one of the most severe competitive challenges” to the major UK supermarkets.

According to Bryan Roberts, a senior vice-president at Kantar Retail, there are three main factors that have propelled the so-called ‘limited assortment grocers’ (LAGs) into their current, albeit slowing, state of outperformance. Here, he presents his analysis…

“The financial crisis: the financial turmoil of 2008, followed by a prolonged period of economic uncertainty and financial austerity, has created an ideal environment in which the LAGs can thrive. ‘Have not’ shoppers, for whom value is non-negotiable, have flocked to the LAGs, encouraged by low price points on private label and, increasingly, branded items. ‘Have’ shoppers, meanwhile, are equally anxious to minimise grocery spend and have been quick to appreciate the operational improvements offered by Aldi and Lidl.

“Discounter strategy: there are two main components of how the strategies put in place by the discounters have enabled them to thrive. The first one is new space. There is a very direct relationship between Aldi and Lidl’s store numbers and market share: each new store opens up the potential for thousands of new consumers to shop at the retailers on a more frequent basis. There are still hundreds of potential new locations for the retailers to open new stores, granting physical access to a retail proposition to many thousands of shoppers for whom shopping with Aldi and Lidl has been practically impossible. The second component of this strategy has been the immeasurable improvement of Aldi and Lidl’s proposition. Encompassing factors such as better private labels; more brands; new departments (e.g. bakery and fish), expanded choice (e.g. produce, health and beauty); improved merchandising (in general and also in ‘hero’ departments like wine); enhanced marketing; augmentations in customer service and better store design, shoppers have eagerly embraced this broad programme of improvements.

“Supermarket strategy: on the flipside, while the discounters were raising their game, a number of the major supermarket groups have shot themselves in the foot. Locked into sprawling store formats, with ranges that have spiralled out of control, financial pressures have prompted some major retailers to disinvest in the in-store experience and cut back on in-store personnel. The precipitous decline in the supermarket experience has been exacerbated by the proliferation of promotional, price-matching and loyalty mechanics that have rendered the supermarket shopping trip an intellectual ordeal.”

The role of high street discounters

Roberts acknowledges that the rise of the LAGs is a well-documented phenomenon, with numerous articles reporting on the advance of Aldi and Lidl as a key factor in the ongoing travails of the Big Four grocers.

“We won’t debate the issue of causality (is Tesco doing poorly because Aldi is thriving? Or is Aldi thriving because Tesco has alienated its own shopper base?), Roberts asks. “But it is worth pointing out that the issue of the High Street Discounters (HSDs) has been less well documented.

“Based on conversations I’ve had with executives at some of the Big Four supermarkets, the HSDs are causing them as much of a headache as the LAGs, capturing a growing number of shopping trips and taking market share in categories such as confectionery, soft drinks, seasonal, snacks, health and beauty, household and ambient grocery.”

Roberts claims such is the rapid pace of growth of these chains that he gets a very real sense that suppliers really are having to try now. “One of the best quotes that I’ve remembered word-for-word was when I was discussing HSDs with a major fast moving consumer goods (FMCG) supplier. She told me ‘we are growing 40% year-on-year with these guys. And we’re not even trying’.”

According to Roberts, direct collaboration with these retailers can avoid risks such as “brand-dilutive grey market imports”, while, at the same time, maximising sales potential through the optimisation of ranging and merchandising.

While the growth of the discounters in the UK is clearly not ‘new news’, Roberts says the fact remains that the channel continues to represent the second-fastest in terms of growth behind e-commerce in the UK’s FMCG market.

“As well as exhibiting high growth rates, the discount channel in the UK remains complex, misunderstood and subject to a rapid pace of evolution and reinvention,” he points out. “We all know that ‘discount’ is growing – but what does ‘discount’ mean? And how do we formulate a strategy to win in this space?

With this already sizeable opportunity in mind, Kantar Retail is hosting a UK-specific discounter event in July. The new workshop will focus on the future of the discount channel in the UK, covering both limited assortment grocery and high street discounters.

“For the first time, UK suppliers will be able to assess the dynamics, threats and opportunities offered by the broader UK discount channel, encompassing both LAGs and HSDs,” Roberts explains.

“In addition to the basics like market sizes and projections, this workshop will equip you with new ways to think about the channel; practical examples and case studies of what good looks like; and recommendations on next steps to optimise your strategies and performance for this high growth opportunity.”